SEC Flags Nvidia Over Alleged Disclosure Deficiencies In Its Cryptocurrency Mining Business | Dechert LLP

The central theses

• The United States Securities and Exchange Commission on May 6, 2022 announced a settlement against chipmaker Nvidia Corporation over insufficient disclosures about the impact of cryptocurrency mining on the company’s gaming business.
• The SEC fined Nvidia $5.5 million, alleging that for consecutive quarters in fiscal 2018, Nvidia failed to disclose that cryptocurrency mining was a “significant element” of its revenue growth from the sale of chips for games may be. The SEC claimed Nvidia knew that a significant portion of the increased sales was due to cryptocurrency mining.
• The SEC focused on the potential harm to investors from the company’s alleged decision to withhold information that clearly pointed to cryptocurrency mining as the driving force behind the surge in gaming revenue.
• Nvidia’s comparison should serve as a warning to public companies that regulators are heavily focused on disclosures related to cryptocurrency markets. Reporting entities whose business activities are influenced by cryptocurrency markets or that engage in practices that help increase the availability of cryptocurrencies, such as B. Cryptocurrency mining, yield farming and staking should ensure that they identify and properly disclose any material risks and impacts to their operations.

introduction

The recent boom in cryptocurrency markets corresponds with an increased demand for semiconductors, as cryptocurrency mining – the process of receiving cryptocurrency rewards in exchange for verifying transactions on distributed ledgers – requires significant computing power. Nvidia Corporation designs and markets graphics processing units (“GPUs”) for use in games, but these GPUs can also be used to provide the computations required for mining certain cryptocurrency networks. Nvidia is one of the two leading GPU manufacturers whose products are widely used for cryptocurrency mining.

In a cease and desist order dated May 6, 2022, the Securities and Exchange Commission announced that Nvidia would pay $5.5 million to settle allegations that it unlawfully concealed the level of its cryptocurrency miner-dependent sales. Nvidia has neither admitted nor denied the allegations.

The SEC allegations

The allegations stem from Nvidia’s disclosures for two consecutive quarters in fiscal 2018 that Nvidia’s GPUs grew in popularity for mining cryptocurrencies like Ether and Zcash. As demand for cryptocurrencies increased in 2017, Nvidia customers increasingly turned to gaming GPUs for cryptocurrency mining. Nvidia then launched a line of GPUs dedicated to cryptocurrency mining, known as “CMPs,” and marketed them to large mining operations.

This increased demand for Nvidia’s gaming GPUs contributed to a significant increase in Nvidia’s revenue in fiscal 2018. and up 25% year over year for the third fiscal quarter of 2018.

According to the SEC, during that time, Nvidia “had information that indicated cryptomining was a significant contributor to the company’s annual GPU revenue growth.” [g]in the relevant period in its GPU business segment.” In addition, Nvidia analysts and investors routinely questioned management on the extent to which cryptocurrency mining had resulted in an increase in gaming revenue.

However, according to the SEC, the company failed to adequately disclose the role of cryptocurrency mining in its gaming revenue figures for those quarters. This, in turn, allegedly gave the misleading impression that these figures reflected reliable future growth, despite the fact that they were allegedly driven by demand from the volatile cryptocurrency market. According to the SEC, these omissions “deprived investors of important information to evaluate the company’s business in a key market.”

Nvidia has disclosed how cryptocurrency mining has impacted other segments of its business. The company identified cryptocurrency mining in its quarterly reports as a massive element of OEM GPU sales within reportable GPU segment revenue, allegedly leading the SEC to believe that the company’s gaming business is not materially impacted by cryptocurrency mining became.

The Nvidia investigation was conducted by an SEC entity responsible for protecting investors in the cryptocurrency markets and from cyber threats, the scope of which has almost doubled in recent times.1

As the Nvidia settlement demonstrates, reporting companies whose products, services, or business activities are impacted by cryptocurrency markets should ensure that they identify and properly disclose any material risks and impacts to their operations in their respective SEC filings.

Associated SEC guidance

The SEC has consistently expressed the view that cryptocurrency agreements pose significant legal, technological, and regulatory risks that regulators claim can materially adversely affect a company’s operations and financial condition. For example, in late March 2022, the SEC issued guidance stating that there are “significant” technological, legal, and regulatory risks associated with protecting cryptocurrency, and cryptocurrency should therefore be reported as a liability on corporate balance sheets.

SEC guidance and Nvidia’s enforcement actions signal that the SEC is paying close attention to disclosures about the risks associated with cryptocurrency, especially as cryptocurrencies become more widespread. The Nvidia case is an important example of how cryptocurrencies are affecting the operations of a growing number of companies and the new risks that reporting companies must consider when analyzing their business and disclosure obligations.

footnotes

1. https://www.sec.gov/news/press-release/2022-78

2. https://www.reuters.com/business/finance/us-sec-says-crypto-safekeeping-arrangements-should-be-treatment-liability-2022-03-31

Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers